NEW YORK (TheStreet) -- The economy is ready for a Federal Reserve interest rate increase, according to one powerful player -- or is it?
Dennis Lockhart, President of the Federal Reserve Bank of Atlanta, is quoted by The New York Times as saying, "the economy is ready for the first increase in short-term interest rates in more than nine years and it would take a significant deterioration in the data to convince him not to move in September."
But, Fed officials have been claiming a need to raise short-term interest rates for most of this year. And yet, nothing has been done. Will the Fed make a move in September? Your guess is as good as mine.
What's going on here? Why hasn't the Federal Reserve raised short-term interest rates this year? Why are we so uncertain about whether or not the Fed will raise short-term interest rates this fall?
Officials at the Fed, as well as most of the rest of us, don't really know what's going on and what might happen. Our models of the world have failed us and we don't have anything to really rely on in the future.
In his analysis, Lockhart, in The New York Times article, places some faith in what was called the "Phillips Curve," a concept that first reached the world in a publication by economist A. W. Phillips in 1958. The Phillips Curve purported to show a short-term negative relationship between unemployment and wages -- and inflation.
Lockhart said he had grown more confident inflation will pick up mainly because slack in the labor market and broader economy is diminishing. "I think a policy maker has to act on the view that the basic relationship in the Phillips curve between inflation and employment will assert itself in a reasonable period of time as the economy tightens up, as the resource picture in the economy tightens."
The United States economy is now beginning its seventh year of recovery. The question is whether or not this is "a reasonable period of time" for this trade off to show up?
Milton Friedman, in 1968, argued that there was no trade off in the longer run that the Phillips Curve argument really isn't helpful in making monetary policy.
And, Lockhart waffles. He says, "I don't think it would be a big policy error to wait somewhat longer. I'm not one to quibble over one meeting or so. But I do think we are close."
The Federal Reserve doesn't seem to have a model of the economy that it trusts. In general, economists and investors don't seem to have a model of the economy that they trust. Consequently, everyone is looking for a path, really doesn't have the foggiest idea of what that path should look like.
The Federal Reserve has a balance sheet that totals $4.5 trillion on July 29, 2015. This balance sheet has resulted in about $2.6 trillion in excess reserves in the commercial banking system.
Many in the Fed want, at some time to return to a more normal balance sheet, whatever that is. On September 4, 2008, the Fed's balance sheet amounted just a little more that $900 billion, compared with the $4.5 trillion now. Excess reserves on that date were less than $4 billion, or $0.004 trillion.
What is normal? How do we get there? And, what about the economy?
Well, the latest Fed staff estimates of economic growth through 2020 is for the real economy to grow at slightly less than a 2% annual rate, fourth quarter over fourth quarter.
The only conclusion one can make from this report is that the Federal Reserve can do very little over the next few years to stimulate economic growth in the United States. And, this is with the inflation rate for the economy staying below the 2% target that the Fed is aiming for and with the effective Federal Funds rate, the Fed's target rate of interest, getting back to a "more normal level" of slightly more than 3%.
Officials at the Fed have never been in a situation like this before. Consequently, most of what they are doing is just guesswork. So, what else is new?